Brokers Fear Arbitration

With arbitration cases on the rise, many brokers are shaking in their wingtips about the prospect of being dragged through a legal process that, because of the current environment, some believe is heavily slanted toward the client, in the words of a UBS PaineWebber rep. Arbitration cases through the second quarter were up 10 percent from 2001, according to the NASD, which estimates that about 7,300

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With arbitration cases on the rise, many brokers are shaking in their wingtips about the prospect of being dragged through a legal process that, because of the current environment, some believe is “heavily slanted toward the client,” in the words of a UBS PaineWebber rep.

Arbitration cases through the second quarter were up 10 percent from 2001, according to the NASD, which estimates that about 7,300 arbitration cases will be filed this year, up from 6,915 cases last year.

Many brokers believe the rising number of arbitrations is a result of investors “never having experienced a down market before — and they're ticked off that they lost their money,” a Wachovia Securities broker says.

Types of cases that have significantly increased this year include those involving omission of facts, failure to supervise and misrepresentation.

Some brokers are being as proactive as possible, expecting that they may get “dinged.”

“You always have to tell a client what can go right and wrong and what the costs are,” says a Merrill Lynch producer. “I also document every phone conversation we have. And I follow up, letting the client know that I documented the conversation…I've found that's a great way to avert arbitration claims, and alleviate any anxiety so you concentrate on your work, not on preparing for a hearing.”

Of course, some brokers deserve discipline.

“There are brokers who churn and should be prosecuted,” a Salomon Smith Barney rep says. Some 440 cases have been filed for churning in 2002's first half, on pace for a 12 percent increase for the year over 2001.

To the chagrin of many reps, firms are sometimes quick to settle, which upsets them and hurts their reputation. Of cases closed last year, 44 percent were settled. Brokers also remain concerned about arbitrators' lack of understanding of what brokers do and attorneys who file “frivolous” cases.

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